Cloud data storage and analytics company Snowflake (NYSE:SNOW) is famous in the investment world for being one of the few tech stocks and the only IPO Berkshire Hathaway has ever bought. Warren Buffett’s holding company owns a stake in Snowflake valued at around $1.2 billion.
Even with the stock down by about 40% from the highs it reached in 2022, Berkshire and other large investors continue to hold Snowflake.
Over 60% of the company’s shares are owned by institutional investors, suggesting that there is still bullish sentiment for the stock on Wall Street. Is Snowflake a buy today, or is the stock still overpriced?
Snowflake’s Current Financial Results
In many ways, Snowflake’s performance is still quite attractive. As of Q3, the company reported year-over-year revenue growth of 32% to $734.2 million. Net revenue retention rate, a measure of overall revenue growth minus churn, was a healthy 135%.
The company successfully generated $102.3 million in free cash flow, amounting to 14% of its total revenues. It should be noted, though, that this free cash flow rate was reported on a non-GAAP basis. Snowflake’s gross margins also remain high, with profit on product revenues at 74% on a GAAP basis and 78% on a non-GAAP basis.
Despite solid performance, Snowflake is still losing money at a very rapid pace. In Q3, GAAP operating losses totaled $260.6 million, translating to an operating margin of -35%. The quarter saw a net loss of $214.3 million, bringing the company’s total losses for the first nine months of 2023 to $666.7 million.
The company’s total assets also diminished considerably over the same period. As of January 31, 2023, Snowflake held $7.72 billion in total assets. By the end of October, this number had fallen roughly 9.4% to $7.26 billion. This included a modest drawdown of cash and cash equivalents.
A final bright spot for Snowflake, however, is its decently strong balance sheet. The company carries effectively no long-term debt, protecting it from the effects of higher rates on loans.
Even with a slight reduction from the beginning of the year, Snowflake’s cash reserve still totals over $980 million. Although Snowflake will need to pare back its losses eventually, it appears to be in no immediate financial danger.
What Does Snowflake’s Runway Look Like?
One of the key questions for investors is how much room Snowflake has for further growth. Bulls argue that the company’s prospects are all but limitless, as the cloud data services it provides will only become more essential as businesses continue to rely more and more heavily on large datasets.
On the downside, revenue growth has already trailed off significantly when compared to what Snowflake was able to achieve just a few years ago.
Throughout 2021, the company consistently maintained triple-digit revenue growth rates. By 2022, those numbers had fallen somewhat into the high double-digit range. Although the most recent report’s growth rate of over 30% is impressive, it appears that Snowflake may be in the process of plateauing for the time being.
Snowflake could, however, get a significant boost as companies incorporate generative AI into their everyday processes. Because of the large amounts of data needed to train AI models, Snowflake and other data management companies could see a boom of corporate investment ahead.
Analysts expect concrete results from AI investments to show up in Snowflake’s results by 2025. If this prediction proves accurate, Snowflake could experience another major surge of growth within the next 24 months that could drive share prices higher.
High Expectations Are Still Priced In
Even with the downward correction Snowflake has seen since its 2021 peak, the stock’s valuation is still fairly high.
Snowflake currently trades at 36.3x sales, a number that’s very high even for a promising growth company.
It’s also worth noting that analysts see little upside for Snowflake in the coming 12 months. The median price forecast for SNOW shares is $220 per share, about 3.3% below the most recent price of $227.50.
Competition and Widening Losses
One of the key risks facing Snowflake is that of an increasingly competitive data storage and management environment. With businesses needing ever more data capacity, there are growing rewards available for the companies that provide data services. As such, Snowflake can expect to see greater competition going forward.
Snowflake maintains a strong competitive edge due to its integrations with Google Cloud, Microsoft Azure and Amazon AWS.
Other companies, however, are gradually closing the gap. One notable example is Databricks, a company that touts a novel data architecture known as a data lakehouse. This approach gives Databricks an advantage in storing and processing large sets of unstructured data, and that advantage could become an important competitive factor as companies seek solutions for machine learning and AI applications.
Another problem for Snowflake is the fact that its net losses have increased, even though its revenues continue to rise. The company has now had seven consecutive quarters in which losses increased, and it’s possible that this trend could continue for some time. Given the fact that Snowflake has lost $796.7 million over the trailing 12-month period, it’s fairly clear that the company won’t achieve profitability anytime soon.
Snowflake Stock Forecast
According to 40 analysts, Snowflake share price is forecast to fall to $222 per share.
Nonetheless, there is a great deal to like about Snowflake. The company is producing strong revenue growth in a market that seems destined to benefit from the latest technological trends. Despite growing competition, Snowflake enjoys a strong position and a large group of high-value customers that will likely give it a fairly defensible moat.
On the downside, the lack of a clear timeline for profitability and a high price relative to sales both reduce Snowflake’s appeal. High pricing may be the largest problem with Snowflake at the moment, as interruptions in growth or lower-than-expected performance in the field of AI could both exert downward pressure on SNOW in the future.
Ultimately, Snowflake appears to be a good stock to hold at the moment. Despite its obvious advantages, the stock still appears a bit too expensive. SNOW’s price at the moment reflects speculative assumptions about rapid revenue growth from AI.
Investors may want to watch for future buying opportunities if prices fall, and those who already own Snowflake will likely do well to keep their shares. For the time being, though, the downsides appear just strong enough to keep Snowflake from being a compelling buy.
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